See accompanying Notes to Condensed Consolidated Financial Statements

VBI Vaccines Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

(in thousands, except number of shares)

See accompanying Notes to Condensed Consolidated Financial Statements

VBI Vaccines Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

See accompanying Notes to Condensed Consolidated Financial Statements

VBI Vaccines Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(in thousands, except share and per share amounts)

See accompanying Notes to Condensed Consolidated Financial Statements

VBI Vaccines Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(in thousands, except share amounts)

See accompanying Notes to Condensed Consolidated Financial Statements

VBI Vaccines Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

See accompanying Notes to Condensed Consolidated Financial Statements

VBI Vaccines Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(in thousands, except per share amounts)

1. NATURE OF BUSINESS AND CONTINUATION OF BUSINESS

Corporate Overview

VBI Vaccines Inc. (formerly SciVac Therapeutics, Inc.(the “Company” or “VBI”) was incorporated under the laws of British Columbia, Canada on April 9, 19651965.

The Company and has the followingits wholly-owned subsidiaries:subsidiaries, VBI Vaccines (Delaware) Inc., a Delaware corporation (“VBI DE”); VBI DE’s wholly-owned subsidiary, Variation Biotechnologies (US), Inc., a Delaware corporation (“VBI US”); Variation Biotechnologies Inc. a Canadian company (“VBI Cda”) and the wholly-owned subsidiary of VBI US;US (“VBI Cda”); and SciVac Ltd. an Israeli company (“SciVac”); and SciVac USA, LLC. a Florida limited liability company (“SciVac US”) and the wholly owned subsidiary of SciVac. VBI Vaccines Inc. and its subsidiaries are collectively referred to as the “Company,” “we,” “us,”“Company”, “we”, “us”, “our” or “VBI”.

The Company’s registered office is located at Suite 1700, Park Place, 666 Burrard Street, Vancouver, BC V6C 2X8 with its principal office is located at 222 Third Street, Suite 2241, Cambridge, MassachusettsMA 02142. In addition, the Company has manufacturing facilities located in Rehovot, Israel and research facilities located in Ottawa, Ontario, Canada.

The Company operates in one segment and therefore segment information is not presented.

Principal Operations

We areVBI is a commercial stagecommercial-stage, biopharmaceutical company developing next generation vaccines to address unmet needs in infectious disease and immuno-oncology. VBI’s first marketedWe currently manufacture our product, is Sci-B-Vac^®, a hepatitisthird generation Hepatitis B (“HBV”) vaccine that mimics all three viral surface antigens of the hepatitis B virus. Sci-B-Vacfor adults, children and newborns, which is approved for use in Israel and 14 other countries. Sci-B-Vac has not yet been approved by the U.S. Food and Drug Administration (the “FDA”), the European Medicines Agency (the “EMA”) or Health Canada. VBI is currently conducting a global Phase III clinical program to obtain FDA, EMA and Health Canada market approvals for commercial sale of Sci-B-Vac in the United States, the European Union (the “EU”), and Canada, respectively. Our wholly-owned subsidiary SciVac Ltd., manufactures Sci-B-Vac in Rehovot, Israel.Israel, currently manufactures and sells Sci-B-Vac.

Following our merger with VBI DE on May 6, 2016 (the “VBI-SciVac Merger”), weWe are also developing technologies that seek to enhance vaccine protection in large, underserved markets. These include an enveloped “Virus Like Particle” or “eVLP” vaccine platform that allows for the design of enveloped virus-like particle vaccines that closely mimic the target viruses. VBI is advancing our two platform technologies – our Enveloped Virus-Like Particlea pipeline of eVLP vaccines, with lead programs in human cytomegalovirus (“eVLP”CMV”) platform technology, an infection that, while common, can lead to serious complications in babies and our Lipid Particle Vaccinepeople with weak immune systems, and is involved in the progression of glioblastoma multiforme (“LPV”GBM”) technology.

, which is a form of brain cancer.

Liquidity and Going Concern

The Company has a limited operating history and faces a number of risks, including but not limited to, uncertainties regarding the success of the development and commercialization of its development activities,products, demand and market acceptance of the Company’s products and reliance on major customers. The Company anticipates that it will continue to incur significant operating costs and losses in connection with the development of its products.

The Company has an accumulated deficit of $122,631$156,226 as of June 30, 2017,March 31, 2018 and cash outflows from operating activities of $(16,132)$8,578 for the sixthree months ended June 30, 2017.March 31, 2018.

The Company will require significant additional funds to conduct clinical and non-clinical studies,trials, achieve regulatory approvals, and, subject to such approvals, commercially launch its products. The Company plans to finance future operations with existing cash reserves. Additional financing, if required, could be a combination of existing cash reserves, proceeds from the issuance of equity securities, the issuance of additional debt, andor revenues from potential collaborations, if any. There is no assurance the Company will manage to obtain these sources of financing.financing, if required. The above conditions raise substantial doubt about the Company’s ability to continue as a going concern. The report of our independent registered public accounting firm on our consolidated financial statements for the year ended December 31, 2016 contains an explanatory paragraph regarding our ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.

On May 15, 2017, the Company entered into an equity distribution agreement (the “Distribution Agreement”) with a registered broker-dealer, as sales agent (the “Sales Agent”), pursuant to which the Company may offer and sell, from time to time, through the Sales Agent its common shares having an aggregate offering price of up to $30 million. The Company is not obligated to sell any common shares under the Distribution Agreement. Subject to the terms and conditions of the Distribution Agreement, the Sales Agent will use commercially reasonable efforts consistent with its normal trading and sales practices, applicable state and federal law, rules and regulations, and the rules of the NASDAQ Capital Market to sell shares from time to time based upon the Company’s instructions, including any price, time or size limits specified by the Company. The Company will pay the Sales Agent a commission of 3.0% of the aggregate gross proceeds from each sale of common shares occurring pursuant to the Distribution Agreement, if any. The Distribution Agreement may be terminated by the Sales Agent or the Company at any time upon ten days’ notice to the other party, or by the Sales Agent at any time in certain circumstances.2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation

The Company’s fiscal year ends on December 31 of each calendar year. The accompanying unaudited condensed consolidated financial statements have been prepared in U.S. dollars (“USD”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”), the instructions to Form 10-Q and the provisions of Regulation S-X pertaining to financial statements.for interim reporting. Accordingly, certain information and footnote disclosures normally included in the financial statements prepared in accordance with United States of America generally accepted accounting principles (“U.S. GAAP”), have been condensed or omitted pursuant to such rules and regulations. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates and are not necessarily indicative of the results to be expected for any future period or the entire fiscal year. The December 31, 20162017 consolidated balance sheet in this document was derived from the audited consolidated financial statements and does not include all of the disclosures required by U.S. GAAP. The condensed consolidated financial statements and notes included in this quarterly report on Form 10-Q (this “Form 10-Q”) should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162017 (the “2016“2017 10-K”), as filed with the SEC on March 20, 2017.February 26, 2018.

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: SciVac, SciVac USA, and from May 6, 2016 the accounts of VBI DE, VBI US and VBI Cda. Intercompany balances and transactions between the Company and its subsidiaries are eliminated in the condensed consolidated financial statements.

In the opinion of management, these condensed consolidated financial statements include all adjustments and accruals of a normal and recurring nature necessary to fairly state the results of the periods presented. The results for the periods presented are not necessarily indicative of results to be expected for the full year or for any future periods.

Reclassification

Certain prior year amounts have been reclassified to conform with the current quarter presentation and were not material to our condensed consolidated financial statements.

Significant Accounting Policies

The significant accounting policies used in the preparation of these condensed consolidated financial statements are disclosed in the 20162017 10-K, and there have been no changes to the Company’s significant accounting policies during the sixthree months ended June 30, 2017.March 31, 2018, other than revenue recognition discussed below.

Revenue recognition

Revenues consist primarily of product sales of vaccines and research services. We apply the five-step model outlined in Accounting Standards Codification Topic 606, Revenue from Contracts from Customers (ASC 606). Revenue is recognized when control of the promised products or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products or services (the transaction price). We adopted ASC 606 effective January 1, 2018. As a result, we have changed our accounting for revenue recognition. We applied ASC 606 using the modified retrospective method and there was no material impact to our consolidated financial statements related to the adoption of ASC 606.

Foreign currency

The functional and reporting currency of the Company is the USD. Each of the Company’s subsidiaries determines its own respective functional currency, and this currency is used to separately measure each entity’s financial position and operating results.

Assets and liabilities of foreign operations with a different functional currency from that of the Company are translated at the closing rate at the end of each reporting period. Profit or loss items are translated at average exchange rates for all the relevant periods. All resulting translation differences are recognized as a component of accumulated other comprehensive loss.loss (income).

Foreign exchange gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved, are included in the condensed consolidated statements of operations.

Use of Estimates

Preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from the estimates made. We continually evaluate estimates used in the preparation of the condensed consolidated financial statements for reasonableness. Appropriate adjustments, if any, to the estimates used are made prospectively based upon such periodic evaluation. The significant areas of estimation include determining the deferred tax valuation allowance, the estimated lives of property and equipment and intangible assets,estimating accrued clinical expenses, the inputs in determining the fair value of equity basedthe in-process research and development (“IPR&D”) and goodwill as part of the annual impairment analysis, the inputs in determining the fair value of equity-based awards and warrants issued as well as the values ascribed to assets acquired and liabilities assumed in a business combination.combinations. Actual results may differ from those estimates.estimates made.

Goodwill and In-Process Research and Development

The Company’s intangiblesintangible assets determined to have indefinite useful lives including in-process research and development (“IPR&D”)&D and goodwill, are tested for impairment annually, or more frequently if events or circumstances indicate that the assets might be impaired.

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. Goodwill can become impaired in certain Such circumstances includingcould include but are not limited to: (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator.

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. When evaluating goodwill for impairment, we may first perform an assessment qualitatively whether it is more likely than not that a reporting unit’s carrying amount exceeds its fair value, referred to as a “step zero” approach. The Company intends to adopt ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” which has eliminated Step 2 from the goodwill impairment test as part of its annual impairment test. Under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under the amendments in this update,Subsequently (if necessary after step zero), an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. Under Accounting Standards Update (“ASU”) 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”, Step 2 from the goodwill impairment test has been eliminated and goodwill impairment is measured as the excess of the carrying amount of the reporting unit over its fair value. The Company has established August 31^st as the date for its annual impairment test of goodwill.

The goodwill is in VBI Cda and the change in carrying value from December 31, 2017 relates to currency translation adjustments which decreased goodwill by $243 for the three-month period ended March 31, 2018.

The costs of rights to IPR&D projects acquired in an asset acquisition are expensed in the consolidated statements of operations unless the project has an alternative future use. These costs include initial payments incurred prior to regulatory approval in connection with research and development agreements that provide rights to develop, manufacture, market and/or sell pharmaceutical products.

IPR&D acquired in a business combination is capitalized as an intangible asset and tested for impairment at least annually until commercialization, after which time the IPR&D is amortized over its estimated useful life. The impairment test compares the carrying amount of the IPR&D asset to its fair value. If the carrying amount exceeds the fair value of the asset, such excess is recorded as an impairment loss.

Fair value measurements of financial instruments

Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (the exit price) in an orderly transaction between market participants at the measurement date. The accounting guidance outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. In determining fair value, the Company uses quoted prices and observable inputs. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources.

The fair value hierarchy is broken down into three levels based on the source of inputs as follows:

Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 — Valuations based on observable inputs and quoted prices in active markets for similar assets and liabilities.

Level 3 — Valuations based on inputs that are unobservable and models that are significant to the overall fair value measurement.

Financial instruments recognized in the condensed consolidated balance sheet consist of cash, accounts receivable, and other current assets, accounts payable and other current liabilities. The Company believes that the carrying value of the aforementionedits current financial instruments approximates their fair values due to the short-term nature of these instruments. The Company does not hold any derivative financial instruments.

The carrying amounts of the Company’s deposits and other long-term assets approximate their respective fair values.

At June 30, 2017March 31, 2018 and December 31, 2016,2017, the fair value of the Company’sour outstanding debt, which is considered level 3 in the fair value hierarchy, is estimated to be approximately $15,472$15,306 and $15,012,$15,157, respectively.

3. NEW ACCOUNTING PRONOUNCEMENTS

In determining the fair value of the long-term debt as of June 30, 2017 and December 31, 2016 the Company used the following assumptions:

The FASB recently issued ASU 2016-16, an accounting standard that requires the seller and buyer to recognize at the transaction date the current and deferred income tax consequences of intercompany asset transfers. The FASB expects the new standard to cause volatility in companies’ effective tax rates, particularly for those that transfer intangible assets to subsidiaries. The standard is effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. While the Company continues to assess the potential impact of this standard, the adoption of this standard isdid not expected to have a material impact on our condensed consolidated financial statements.statements and footnote disclosures.

Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. This update will change the income statement impact of equity investments held by an entity; disclosures related to fair value of financial instruments and presentation of financial assets and liabilities. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities must apply the standard using a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. Except for certain early application guidance, early adoption is not permitted. The Company is currently assessingWe adopted this ASU effective January 1, 2018 and are no longer required to disclose the impact that adopting this new ASU will have on our financial statements andfair value assumptions in determining the fair value of the long-term debt in the footnote disclosures.

Clarifying the Scope of Asset Derecognition Guidance andRecently Issued Accounting for Partial Sales of Nonfinancial AssetsStandards, not yet Adopted

Leases

In February 2017, The2016 the FASB issued ASU 2017-05, “Other Income – Gains2016-02: Leases. The ASU introduces a lessee model that results in most leases impacting the balance sheet. The ASU addresses other concerns related to the current leases model. Under ASU 2016-02, lessees will be required to recognize for all leases with terms longer than 12 months, at the commencement date of the lease, a lease liability, which is a lessee’s obligation to make lease payments arising from a lease measured on a discounted basis, and Losses froma right-to-use asset, which is an asset that represents the Derecognition of Nonfinancial Assets (Subtopic 610-12): Clarifyinglessee’s right to use or control the Scope of Assets Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets”. This amendment in this update clarifies the guidance on accounting for derecognitionuse of a nonfinancialspecified asset and an in-substance nonfinancial asset and applies only whenfor the asset (or asset group) does not meetlease term. Leases will be classified as either finance or operating, with classification affecting the definitionpattern of a business; defines in-substance nonfinancial assets; and provides guidance for partial sales of nonfinancial assets. ASU 2017-05expense recognition. The update is effective for annual reporting periodsfiscal years beginning after December 15, 2017,2018, including interim periods within those fiscal years. While we continue to evaluate the Company continueseffect of adopting this guidance on our consolidated financial statements and related disclosures, we expect our operating leases, as disclosed in Note 11, will be subject to assess the potential impact of this standard, thenew standard. We will recognize right-of-use assets and operating lease liabilities on our consolidated balance sheets upon adoption, of this standard is not expected to have a material impact on its financial statements.which will increase our total assets and liabilities.

4. INVENTORY, NET

Inventory is stated at the lower of cost or market and consists of the following:

5. INTANGIBLES

The Company amortizes intangible assets with finite lives on a straight-line basis over their estimated useful lives. The amortization expense for the three and six months ended June 30, 2017 was $15 and $30, respectively compared

Amortization related to the three and six months ended in 2016 of $16 and $31, respectively.

The IPR&D assets relate to the May 6, 2016 VBI-SciVac Merger and will not begin amortizing until the Company commercializes its products. Future costs incurred to extend the life

6. OTHER CURRENT LIABILITIES

Other current liabilities consisted of the patents will be expensed.following:

7. LOSS PER SHARE OF COMMON SHARES

Basic loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number of shares of common shares outstanding during each period. Diluted loss per share includes the effect, if any, from the potential exercise or conversion of securities, such as warrants, and stock options, which would result in the issuance of incremental shares of common shares unless such effect is anti-dilutive. In computing the basic and diluted net loss per share applicable to common stockholders, the weighted average number of shares remains the same for both calculations due to the fact that when a net loss exists, dilutive shares are not included in the calculation as their effect would be anti-dilutive. These potentially dilutive securities are more fully described in Note 8,9, Stockholders’ Equity and Additional Paid-in Capital.

The following potentially dilutive securities outstanding at June 30,March 31, 2018 and 2017 and 2016 have been excluded from the computation of diluted weighted average shares outstanding, as they would be antidilutive:

8. LONG-TERM DEBT – RELATED PARTY

As at June 30, 2017March 31, 2018 and the December 31, 2016,2017, the outstandinglong-term debt is as follows:

As a result of the VBI-SciVac Merger,On May 6, 2016, the Company through VBI DE assumed a term loan facility with Perceptive Credit Holdings, LP, a related party, (the “Lender”) in the amount of $6,000 (the “Facility”), with an initial advance of $3,000 drawn down on prior to the VBI-SciVac Merger. As of the date of the VBI-SciVac Merger, the Company assumed an amount of $2,361 in the Facility.. On December 6, 2016, the Company amended the Facility (the “Amended Facility”) and raised an additional $13,200 which was combined with the remaining balance from the Facility of $1,800. The total principal outstanding at June 30, 2017,March 31, 2018, including the $300 exit fee discussed below, is $15,300 before$15,300. Borrowings under the net deferred financing costs and unamortized debt discountAmended Facility are secured by all of $2,758.VBI assets. The principal on the Amended Facility accrues interest at an annual rate equal to the greater of (a) one-month LIBOR (subject to a 5.00% cap) or (b) 1.00%, plus the applicable margin.Applicable Margin. The applicable marginApplicable Margin will be 11.00%. The first eighteen months are interest only. The interest rate as of June 30, 2017March 31, 2018 was 12.2%12.88%. Upon the occurrence of an event of default, and during the continuance, of an event of default, the applicable marginApplicable Margin, defined above, will be increased by 4.00% per annum. The Amended FacilityThis term loan facility matures December 6, 2019 and includes both financial and non-financial covenants, including a minimum cash balance requirement of $2,500.requirement. The Company was in compliance with these covenants as of June 30, 2017.March 31, 2018. Pursuant to the Amended Facility, the Company agreed to appoint a representative of the Lender to the BoardPerceptive Credit on our board of directors (the “Board”) who is also a portfolio manager of the Company’s largest shareholder.shareholder, effective January 2018, Perceptive Credit’s representative resigned from our Board.

The Company’s obligations under the Amended Facility are secured on a senior basis by a lien on substantially all of the assets of the Company including the Company’s interest in its subsidiaries, and its U.S. and Canadian subsidiaries and guaranteed by the Company and its U.S. and Canadian subsidiaries. The Amended Facilityand Restated Credit Agreement also contains customary events of default.

In connection with the Amended Facility, on December 6, 2016, the Company issued to the Lender two tranches of warrants. The first tranche was a warrant to purchase 363,771 common shares at an exercise price of $4.13 per share and the second tranche was a warrant to purchase 1,341,282 common shares at an exercise price of $3.355 per share. The total proceeds from the Amended Facility attributed to the warrants was $2,793, based on the relative fair value of the warrants as compared to the sum of the fair values of the warrants and debt. This attribution resulted in the debt being issued at a discount. The Company incurred $360 of debt issuance costs and is required to pay an exit fee of $300 upon full repayment of the debt resulting in additional debt discount. The total debt discount of $3,453 is being charged to interest expense using the effective interest method over the term of the debt. As of June 30,March 31, 2018, and December 31, 2017, the unamortized debt discount is $2,758.$1,864 and $2,163. The Company recorded $586$299 and $288 of interest expense related to the amortization of the debt discount during the sixthree months ended June 30, 2017.March 31, 2018 and 2017, respectively.

Total related party interest expense, including the amortization of the debt discount, was $773 and $738 for the three months ended March 31, 2018 and 2017, respectively. Such amounts are included in Interest expense, net in the accompanying condensed consolidated statements of operations and comprehensive loss.

The following table summarizes the future principal payments that the Company expects to make for long-term debt:

9. STOCKHOLDERS’ EQUITY AND ADDITIONAL PAID-IN CAPITAL

Prior to the VBI-SciVac Merger, one of the Company’s directors was also the chairman of the board of Kevelt AS (“Kevelt”), a wholly owned subsidiary of OAO Pharmsynthez (“Pharmsynthez”), a shareholder of the Company and was also the chairman of the board of Pharmsynthez. Following the VBI-SciVac Merger, in accordance with the merger agreement, this director resigned.

On April 26, 2013, SciVac entered into a Development and Manufacturing Agreement (“DMA”) with Kevelt, pursuant to which SciVac agreed to develop the manufacturing process for the production of clinical and commercial quantities of certain materials in drug substance form. On July 30, 2016, the Company received a letter of termination from Kevelt, in part containing a request for refund of $2.5 million it had previously transferred to the Company. Such amount is included in other current liabilities in the accompanying condensed consolidated financial statements.

SciVac entered into a services agreement with OPKO Biologics Ltd. (“OPKO Bio”), a wholly-owned subsidiary of OPKO Health, Inc., a related party shareholder of the Company, dated as of March 15, 2015, as amended on January 25, 2016, pursuant to which SciVac agreed to provide certain aseptic process filling services to OPKO Bio. The terms of the services agreement are based on market rates and comparable to other non-related party service agreements.

See Note 6, Long-term Debt, for the Facility from a lender that is also affiliated with the Company’s largest shareholder.

Subsequent to the VBI-SciVac Merger on May 6, 2016, Kevelt and Pharmsynthez are no longer considered related parties due to the common shareholder no longer having significant influence.

Stock option plans

The Company’s stock option plans are approved by and administered by the Company’s board of directors (the “Board”)Board and its Compensation Committee. The Board designates, in connection with recommendations from the Compensation Committee, eligible participants to be included under the plan, and designates the number of options, exercise price and vesting period of the new options.

2006 VBI US Stock Option Plan

No further options will be issued under the 2006 VBI US Stock Option Plan (the “2006 Plan”). As at June 30, 2017,March 31, 2018, there were 1,3111,140,053 options outstanding under the 2006 Plan.

2013 Stock Incentive Plan

No further options will be issued under the 2013 Equity Incentive Plan (the “2013 Plan”). As at June 30, 2017,March 31, 2018, there were 54,613 options outstanding under the 2013 Plan.

2014 Equity Incentive Plan

No further options will be issued under the 2014 Equity Incentive Plan (the “2014 Plan”). As at June 30, 2017,March 31, 2018, there were 735645,222 options outstanding under the 2014 Plan.

2016 VBI Equity Incentive Plan

The 2016 VBI Equity Incentive Plan (the “2016 Plan”) is a rolling incentive plan that sets the number of common shares issuable under the 2016 Plan, together with any other security-based compensation arrangement of the Company, at a maximum of 10% of the aggregate common shares issued and outstanding on a non-diluted basis at the time of any grant under the 2016 Plan. The 10% maximum is inclusive of options granted under all equity incentive plans. The 2016 Plan is an omnibus equity incentive plan pursuant to which the Company may grant equity and equity-linked awards to eligible participants in order to promote the success of the Company following the VBI-SciVac Merger by providing a means to offer incentives and to attract, motivate, retain and reward persons eligible to participate in the 2016 Plan. Grants under the 2016 Plan include a grant or right consisting of one or more options, stock appreciation rights (“SARs”), restricted share units (“RSUs”), performance share units (“PSUs”), shares of restricted stock or other such award as may be permitted under the 2016 Plan. As at June 30, 2017,March 31, 2018, there were 4111,639,114 options and 498531,547 stock awards outstanding under the 2016 Plan.

The aggregate number of common shares remaining available for issuance for awards under this plan was 579total 1,936,496 at June 30, 2017.

March 31, 2018.

Activity related to stock options is as follows (in thousands, except for weighted average exercise price):follows:

Information relating to restricted stock units is as follow (in thousands, except forfollow:

In determining the amount of stock-based compensation the Company used the Black-Scholes option pricing model to establish the fair value of options granted by applying the following weighted average fair value at grant date):assumptions:

The fair value of the options expected to vest will beis recognized as an expense on a straight-line basis over the vesting period.period and forfeitures are accounted for when they occur. The total stock-based compensation expense recorded in the three and six months ended June 30,March 31, 2018 and 2017 and 2016 was as follows:

10. INCOME TAXES

The Company operates in U.S., Israel and Canadian tax jurisdictions. Its income is subject to varying rates of tax, and losses incurred in one jurisdiction cannot be used to offset income taxes payable in another.

The Company determines its annual effective tax rate at the end of each interim period based on the year to date period results. Since the Company is incorporated in Canada, it is required to use Canada’s statutory tax rate of 26.00% in the determination of the estimated annual effective tax rate.

The Company’s effective tax rate on loss before tax for the three and six months ended June 30, 2017March 31, 2018 of 0% and 2.38%, respectively (0%(4.78% - 2016)2017) differs from the Canadian statutory rate of 26%26.00% primarily due to the recognition ofrecording a valuation allowance on the Canadian deferred tax assets as well as onin excess of the otherremaining Canadian deferred tax liability and the effect of recording a valuation allowance against deferred tax assets in all other jurisdictions.

The Company maintains a valuation allowance on all of its net deferred tax assets. A valuation allowance is required when, based upon an assessment of various factors, including recent operating loss history, anticipated future earnings, and prudent and reasonable tax planning strategies, it is more likely than not that some portion of the deferred tax assets will not be realized.

Licensing11. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

From time to time, the Company may be involved in certain claims and litigation arising out of the ordinary course of business. Management assesses such claims and, if it considers that it is probable that an asset had been impaired or a liability had been incurred and the amount of loss can be reasonably estimated, provisions for loss are made based on management’s assessment of the most likely outcome. TheAs at March 31, 2018 the Company believes that it maintains adequate insurance coverage for any such litigation matters arising in the normal course of business.

Operating Leases

The Company has entered into various non-cancelable lease agreements for its office, lab and manufacturing facilities. These arrangements expire at various times through 2022. Rent expense for the three months ended June 30,March 31, 2018 and 2017 was $216 and 2016 was $239 and $92, respectively and for the six months ended June 30, 2017 and 2016 was $456 and $187,$217, respectively.

The future annual minimum payments under these leases is as follows:

On February 28, 2018 VBI DE signed a two-year term extension, which included additional office space, related to the office space in Cambridge, MA committing it to approximately $461 of rent payments which has been included in the above table.

12. SEGMENT INFORMATION

The Company’s Chief Executive Officer (“CEO”) has been identified as the chief operating decision maker. The CEO evaluates the performance of the Company and allocates resources based on the information provided by the Company’s internal management system at a consolidated level. The Company has determined that it has only one operating segment.

Revenues from external customers are attributed to geographic areas based on location of the contracting customers:

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q and with our audited consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2016,2017, as filed with the U.S. Securities and Exchange Commission (the “SEC”).

OverviewExcept for per share amounts or as otherwise specified to be in millions, amounts presented are stated in thousands.

VBI- SciVac Merger

On May 6, 2016, the Company completed its acquisition of VBI DE, pursuant to which Seniccav Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of the Company, merged with and into VBI DE, with VBI DE continuing as the surviving corporation and as a wholly-owned subsidiary of the Company (the “VBI-SciVac Merger”). Upon completion of the VBI-SciVac Merger, the Company changed its name to “VBI Vaccines Inc.” and its common shares commenced trading on The NASDAQ Capital Market. The common shares began trading on The NASDAQ Capital Market under the ticker symbol “VBIV.” Prior to the VBI-SciVac Merger, the Company’s common shares were only listed on the Toronto Stock Exchange (the “TSX”) under the symbol “VAC.” Following the effective time of the VBI-SciVac Merger, the common shares began to trade on the TSX under the new symbol “VBV.”

Principal OperationsOverview

We are a commercial stagecommercial-stage, biopharmaceutical company developing next generation vaccines to address unmet needs in infectious disease and immuno-oncology. Our first marketedWe currently manufacture our product, is Sci-B-Vac^®, a third-generation hepatitis B virus (“HBV”) vaccine, that mimics all three viral surface antigens of the hepatitis B virus. Sci-B-Vacwhich is approved for use in Israel and 14 other countries. Our wholly-owned subsidiary, SciVac Ltd., manufactures Sci-B-Vac, has not yet been approved by the FDA, EMA or Heath Canada. The Sci-B-Vac vaccine has demonstrated safety and efficacy in Rehovot, Israel.

Weare also advancing our two platform technologies – our “enveloped” virus-like particle (“eVLP”) platform technologynearly 500,000 patients in currently licensed markets. Several clinical trials have shown rapid and our thermostable lipid particle vaccine (“LPV”) technology.

Sci-B-Vac Clinical Program

Recently, we completed a post-marketinghigh rates of seroprotection with Sci-B-Vac. The Phase IV clinical study, conducted in Israel for Sci-B-Vacin order to confirmqualify a new in-house reference standard for regulatory and quality control purposes. Sci-B-Vac has not yet been approved by the U.S. Food and Drug Administration (the “FDA”), the European Medicines Agency (the “EMA”) or Health Canada (“HC”). VBI ispurposes, was successfully completed. We are currently developingenrolling patients in a pivotal Phase III clinical program, the results of which are intended to support regulatory and marketing authorization application submissions to obtain FDA, EMA, and HCHealth Canada market approvals for commercial sale of Sci-B-Vac in the United States,U.S., Europe, and Canada respectively. On July 11, 2017, we announced plans for a global Phase III clinical program for Sci-B-Vac following discussions with the FDA, the EMA,Our wholly-owned subsidiary in Rehovot, Israel currently manufactures and HC. The Phase III program is expected to be a global 15-month program, consisting of two concurrent Phase III studies – a safety and immunogenicity study (“PROTECT”) and a lot-to-lot consistency study (“CONSTANT”), enrolling approximately 4,800 subjects. The Phase III program is expected to be conducted at approximately 40 sites across the U.S., Europe, and Canada.

PROTECT – Safety and Immunogenicity Study

The co-primary objectives of the study will be:

The study will also include multiple secondary objectives to evaluate the speed to seroprotection and the overall safety and tolerability of Sci-B-Vac as compared to Engerix-B.sells Sci-B-Vac.

CONSTANT – Lot-to-Lot Consistency Study

The primary objectiveWe are also advancing a pipeline of thisenveloped virus-like particle (“eVLP”) vaccines, developed with our eVLP platform technology that allows for the design of enveloped virus-like particles that closely mimic the target viruses. We have lead programs in both infectious disease, with our congenital cytomegalovirus (“CMV”) vaccine candidate, and in immuno-oncology, with our glioblastoma multiforme (“GBM”) vaccine candidate. CMV is an infection that, while common, can lead to serious complications in babies and people with weak immune systems. In September 2016, we completed the enrollment and initial dosing of 128 participants in the Phase I clinical study will be to demonstrate lot-to-lot consistency for immune response as measured by geometric mean concentration (GMC) of antibodies across three independent, consecutive lots of Sci-B-Vac four weeks after the third vaccination.

The secondary objective will be to evaluate safety and efficacy of Sci-B-Vac as compared to Engerix-B.

On June 14, 2017, HC provided us with a No Objection Letter for both Sci-B-Vac Phase III clinical studies, which authorized us to proceed with theSci-B-VacPhase III clinical studies as described in our clinical trial application.

Congenitalits preventative CMV Vaccine Candidate (eVLP)

Our second lead program is a vaccine for congenital CMV a leading cause of birth defects, that is in Phase I development.

candidate. In July 2017, we announced interim data read-outfrom the Phase I clinical study of safety data through day 84 of the study and initial immunogenicity signals in participant samples collected one month after the second of three planned vaccine doses as follows:

The finaldoses. Final data read-outread out is anticipated mid-year 2018. In January 2018, VBI initiated dosing of safetyits GBM candidate in a Phase I/IIa clinical program. We expect immunologic data from ongoing biomarker analyses mid-year 2018 and immunogenicity, following a third vaccination isinitial correlations between biomarker analyses and clinical outcomes in the second half of 2018, with 6-month overall survival and progression-free survival expected in the first half of 2018.2019.

Therapeutic GBM Vaccines (eVLP)We may also seek to in-license clinical-stage vaccines that we believe complement our product and pipeline portfolio, in addition to technologies that may supplement our therapeutic vaccination efforts in immuno-oncology.

We also have a therapeutic GBM brain cancer vaccine, for which we filed an investigational new drug application on July 12, 2017, which must be reviewed by the FDA before human clinical trials may begin. If successful, we expect to be able to initiate enrollment in a Phase I/IIA clinical study in the second half of 2017.

At present, our operations are focused on:

VBI’s income generating activities have been the sale of Sci-B-Vac product in markets where it is approved, though those markets have generated a limited number of sales to-date and R&D services generating fees. VBI has incurred significant net losses and negative operating cash flows since inception and expect to continue incurring losses and negative cash flows from operations as we carry out our, planned clinical, regulatory, R&D, sales and manufacturing activities with respect to the advancement of our Sci-B-Vac and new vaccine candidates. As of March 31, 2018, VBI had an accumulated deficit of approximately $156.2 million and stockholders’ equity of approximately $106.5 million. Our ability to maintain our status as an operating company is dependent upon obtaining adequate cash to finance our clinical development, manufacturing, our administrative overhead and our research and development activities. We plan to finance future operations with existing cash reserves. We expect that we will need to secure additional financing to finance our business plans, if required, which may be a combination of proceeds from the issuance of equity securities, the issuance of additional debt, and revenues from potential collaborations, if any. There is no assurance the Company will manage to obtain these sources of financing, if required. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements have been prepared assuming that we will continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should we be unable to continue as a going concern.

We have incurred operating losses since inception, have not generated significant product sales revenue and have not achieved profitable operations. We incurred net losses of $12.3 million for the three months ended March 31, 2018 and we expect to continue to incur substantial losses in future periods. We anticipate that our operating expenses will increase substantially as we continue our clinical studies. These include expenses related to:

In addition, we have incurred and will continue to incur significant expenses as a public company, which subjects us to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of the NASDAQ Capital Market and the Canadian securities regulators. Effective as of March 23, 2018, we voluntarily delisted our common shares from the Toronto Stock Exchange.

In 2017, we raised $71.9 million from equity financings to support our Sci-B-Vac, CMV, and GBM vaccine programs, to continue the advancement of our research programs, and for use in other general corporate purposes. Based upon our current cash position and by monitoring our discretionary expenditures as well as the management of our clinical trial commitments and operating costs, we believe these proceeds will be sufficient to fund our activities, including our approved capital expenditure requirements throughout 2018. We expect, however, that additional financing will be needed in the future to further support clinical, regulatory, research and development, sales and manufacturing, and general business operations.

Since inception, VBI and its subsidiaries collectively have raised approximately $196.6 million in total equity and debt financing to support clinical and research development and general business operations.

Research and Development (“R&D&D”) Services

Pursuant to an agreement with the Israel Innovations Authority (formerly the Office of the Chief Scientist in Israel, we areof Israel), the Company is required to make services available for the biotechnology industry in Israel. These services include relevant activities for development and manufacturing of therapeutic proteins according to international standards and cGMPGMP quality level suitable for toxicological studies in animals and clinical studies (Phase I & II) in humans. Service activities include analytics/bio analytics methods for development and process development of therapeutic proteins starting with a lead candidate clone through the upstream, purification, formulation and filling processes and manufacturing for Phase I & II clinical studies.trials.

These R&D services are primarily marketed to the Israeli research community in academia and Israeli biotechnology companies in the life sciences lacking the infrastructure or experience in the development and production of therapeutic proteins andin the standards and quality required for clinical studiestrials for human use. In 2016 and 2015, we2017 the Company provided services to more than 10 biotechbiotechnology companies including analytical development, upstream development process, protein purification and formulation and filling for Phase I clinical studies.

VBI Cda also provides R&D services pursuant to a research agreement and certain governmental research and development grants.

Financial Overview

Overall Performance

WeThe Company had net losses of approximately $9,013$12,251 and $6,416$8,638 for the three months ended June 30,March 31, 2018 and 2017, and 2016, respectively and $17,651 and $7,495 for the six months ended June 30, 2017 and 2016, respectively. At June 30, 2017, we hadThe Company has an accumulated deficit of $122,631,$156,226 at March 31, 2018. The Company had $58,094 of cash on hand of $15,642at March 31, 2018 and net working capital of approximately $9,431.$44,339.

R&DCost of revenues

Cost of revenues consist primarily of costs incurred for manufacturing the Sci-B-Vac vaccine, which includes cost of materials, consumables, supplies, contractors and manufacturing salaries.

Research and Development Expenses

R&D expenses consist primarily of costs incurred for the development of our CMV, GBM, and Sci-B-Vac vaccines, which include:

We expense R&D costs when we incur them.

General and Administrative Expenses

General and administrativeadministration expenses consist principally of salaries and related costs for executive and other administrative personnel and consultants, including stock-based compensation and travel expenses. Other general and administrativeadministration expenses include professional fees for legal, patent protection, consulting and accounting services, travel and conference fees, including board and scientific advisory board meeting costs, rent, maintenance of facilities, depreciation, office supplies and expenses, insurance and other general expenses. General and administrative expenses are expensed when incurred.

We expect that our general and administrativeadministration expenses will increase in the future as a result of adding employees and scaling our operations commensurate with advancing clinical candidates and continuing to support a public company infrastructure. These increases will likely include increased costs for insurance, hiring of additional personnel, board committees, outside consultants, investor relations, lawyers and accountants, among other expenses.

Interest Income

Interest income consists principally of interest income earned on cash balances and on R&D tax refunds.balances.

Interest Expense

Interest expense is associated with our previously outstanding convertible notes and the credit facility entered into on July 25, 2014 and subsequently amended on December 6, 2016.

Results of Operations

Three and Six Months Ended June 30, 2017March 31, 2018 Compared to the Three and Six Months Ended June 30, 2016March 31, 2017

All dollar amounts stated below are in thousands, unless otherwise indicated.